2 months ago

Blue Chip Issue 79

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This 79th issue of Blue Chip focuses on the art, science and business of investment. Blue Chip is the financial planner’s chaperone to everything investment and this edition is a smorgasboard of the choices, decisions, lessons and associations that relate to it.


INVESTMENT Portfolio options Momentum Investments discusses their fixed income and smart beta offerings FIXED INCOME INVESTMENTS Zisanda Gila, Portfolio Manager What is the role of fixed income investments in a client’s portfolio? Fixed income investments traditionally fulfil three important roles within a client portfolio: • Income stream from the regular coupon payments received on set dates over the life of the investment, which helps investors plan their finances and the liquidity requirements. • Capital protection and capital repayment when the security reaches maturity. Fixed income securities generally experience lower price volatility compared to equities, which makes them effective capital preservation tools, though these also fluctuate from time to time in reaction to interest rates changes and economic cycles. • Diversified returns. Each instrument provides different returns based on various factors such as the yield, type of bond, duration, issuer credit quality and instrument ranking in the company structure. Diversification, in-depth analysis into each investment, and the right balance of asset allocation enable investors to earn these risk-adjusted returns from diversified sources. What is Momentum Investments’ fixed income investment philosophy and process? Philosophy. The Momentum Investments fixed income philosophy is risk and valuation based. We view interest rates as an opportunity set on a relative and an absolute basis. Our focus is on achieving superior risk-adjusted returns through interest rate cycles. We believe investing is personal, and portfolio construction is central to what we do, as we need to meet our client objectives over appropriate investment horizons. We believe diversification of strategies leads to more consistent returns over time. Investment process. The key aspects of our investment process involve identifying investment opportunities, investment research and portfolio management. These aspects, combined with the major drivers, namely the investment objective, risk appetite, return drivers and constraints, contribute to our process of constructing a portfolio. In our investment process, we diversify across investment types and various yield curves to earn better returns. To achieve and maintain efficient portfolio construction over time, we also invest in derivatives and a mix of floating and fixed-rate notes to manage the interest rate risk. Our fixed income funds aim to provide steady income at the lowest risk possible and to deliver superior returns on a risk-adjusted basis across the various strategies. The investment horizon ranges from short to long term and we align that with the interest rate risk the fund can take. We use the short end of the money market curve for liquidity, mainly bank issued notes, and the longer end of the curve for excess alpha. SMART BETA EQUITY FUNDS Wayne Dennehy, Head of Systematic Strategies and Structuring Please tell us about smart beta equity portfolios. Smart beta equity funds look active in terms of their returns relative to the market but are not actively managed funds in the commonly understood sense. Market cap-weighted index funds such as the Momentum Capped SWIX Index Fund hold shares that match the relative size of each share in the market. Smart beta equity funds hold shares in the fund weighted by anything other than size and can outperform the market in different cycles. Smart beta funds, though, are only as smart as the process and the data that goes into the process and at Momentum Investments, we continually evaluate the process and the results to get the best possible results. Smart beta funds allow investors to access particular equity styles in the market in a clean and cost-efficient way. In South Africa, these styles are value, momentum/trending and quality, among others. The Momentum Trending Equity Fund, a smart beta equity fund, came 21st out of 146 funds in the Asisa General Equity Category over three years ending 31 December 2021. Each of the Smart Beta strategies has its own underlying philosophy. What are they? The process behind the different smart beta equity strategies is identical, albeit with different inputs to assess whether a share has earned its place in a particular fund. The philosophy between the smart beta funds is different: • Momentum Trending Equity Fund: The trend is your friend, cut your losses early and let your profits run. • Momentum Value Equity Fund: Buy low, sell high. Buy companies that have overreacted due to market sentiment or normal cyclical behaviour. Quoting Warren Buffett, “Price is what you pay, value is what you get.” • Momentum Quality Equity Fund: Buy companies that are superior in terms of profitability, stability and credibility. Get rewarded for buying growth companies that have less risk than what appears. With us, investing is personal and we have a wide range of funds and capabilities to meet different client needs. We focus on partnering with our advisors and advisor networks to deliver the best results to investors and help them achieve their personal financial goals. Investing is personal and portfolio construction is central to what we do. 18

Multiasset-class solutions Fixed income solutions MI-CL-8-AZ-136660 Index tracker solutions Equity solutions Property solutions Smart beta solutions Alternative investment solutions Whatever your clients’ investment journey, we have the investment capabilities to help them achieve their goals. Because with us, it’s personal. Global solutions We pride ourselves on the vast range and diversity of our investment capabilities. Whatever investment road your clients are on, we have the investment capabilities they need to achieve their goals. We work with you to choose suitable options that can help transform each client’s hopes and dreams into reality. Join the unstoppable force of momentum. Because with us, it’s personal. Speak to your Momentum Consultant or visit Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.

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